Today's Question
Marginal Cost (MC) is the additional cost of producing one more unit. It's the cost of the NEXT unit, not the average. If a factory produces 100 phones at total cost $10,000, and 101 phones at total cost $10,150, the marginal cost of the 101st phone is $150. Why is marginal cost (not average cost) the key number for deciding whether to accept a new order?
Model Answer
Because average cost includes 'sunk' costs already spent. If your average cost is $100/phone but the next phone only costs $80 (marginal cost), you should accept any order above $80 - you'll make money on that specific unit! This is why airlines sell last-minute seats cheaply: the plane is flying anyway (fixed cost), so any price above the marginal cost (fuel, snacks) adds profit.
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